What are the penalties if I submit my VAT return late?

The changes affect VAT Returns for accounting periods starting on or after 1st January 2023. HMRC has also introduced a period of familiarisation and will not be charging a first late payment penalty for the first year from 1st January 2023 until 31st December 2023, if you pay in full within 30 days of your payment due date.

How does the new VAT penalty system affect late VAT returns?

In contrast to the previous system, late submission penalties will work on a new points-based system from 1st January 2023.

For each late VAT return, you will receive one late submission penalty point.

Once a penalty threshold is reached, HMRC will issue a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty points threshold will vary according to your VAT return submission frequency:

Submission frequency	Penalty points threshold
Annual VAT returns	2
Quarterly VAT returns	4
Monthly VAT returns	5

HMRC will reset your points back to zero if your VAT returns are filed on time for what they call your ‘period of compliance’, and this will be based on your submission frequency. You  must also make sure all outstanding returns due for the previous 24 months have been received by HMRC.

Submission frequency	Penalty points threshold
Annual VAT returns	24 months
Quarterly VAT returns	12 months
Monthly VAT returns	6 months

For example, if your VAT return is filed on a quarterly basis and the following returns are late:

• March 2024 quarterly VAT return
• June 2024 quarterly VAT return
• September 2024 quarterly VAT return

HMRC will apply three points for the above three late VAT returns.

If the business accrues a further late filing point within the 12-month compliance period, HMRC will issue a £200 late filing penalty.

The system is designed to make the penalty regime fairer by punishing frequent late filers and being more lenient for businesses who are occasionally late.

As well as new rules for returns, HMRC also plans penalty changes for late payment and interest charges. 

When will I receive VAT penalties?

HMRC has wide powers to impose penalties on businesses who incorrectly apply the VAT rules. Penalties can apply in the following situations:

• Late VAT returns
• Late VAT payments
• Late VAT registration
• VAT errors

Late payment

The new regime replaces the default surcharge, which covered both late VAT return submission and late VAT payments.

From 1st January, there are two late payment penalties to be aware of.

The first late payment penalty kicks in if your payment is 16 or more days overdue.

The second kicks on when your payment is 31 or more days overdue and your first late payment penalty also increases:

	First late payment penalty	Second late payment penalty
Payment up to 15 days overdue	None	None
Payment between 16 and 30 days overdue	Calculated at 2% on the VAT you owe at day 15.	None
Payment 31 days or more overdue	Calculated at: • 2% of what was outstanding at day 15 • plus 2% of what is still outstanding at day 30	Calculated at: • a daily rate of 4% per year on the outstanding balance • charged everyday from day 31 until the outstanding balance is paid in full

Provided your VAT is paid within 15 days of being due, HMRC will not charge a late payment penalty. However, HMRC will still charge late payment interest.

To give businesses time to get used to these changes, HMRC will not be charging a first late payment penalty until after 31st December 2023. This is on the proviso that you pay your bill in full or enter into a Time to Pay arrangement within 30 days of your payment due date.

For VAT accounting periods starting on or after 1st January 2023 if you pay VAT late, HMRC will charge late payment interest on the amount outstanding, from the first day your payment is overdue to the day you pay it in full.

If you cannot pay the VAT you owe on time you can get help and support and you should contact HMRC as soon as possible as you may be able to arrange a Time To Pay arrangement. This will help further penalties being applied by HMRC.

What were the old VAT rules?

VAT-registered businesses were required to submit their VAT returns and ensure payment of VAT due had cleared to HMRC’s bank account on time.

HMRC considered you are in ‘default’ if you have not received your VAT Return by the due date. This applies even if your return is ‘nil’ or shows a repayment is due from HMRC. You will also be considered to be in default if full payment for the VAT shown as due on your return, has not cleared to the HMRC account.

On a first default, HMRC will send you a Surcharge Liability Notice. The notice will warn you that if you default in respect of an accounting period ending within a specified period, you may have to pay a surcharge to HMRC.

If you subsequently default during a surcharge period, and there’s VAT outstanding for the tax period in default, HMRC charged a default surcharge. HMRC also sent a Surcharge Liability Notice Extension, which will extend the surcharge period together with surcharge assessment, if a surcharge is due. HMRC levvied a surcharge of up to 15% for repeat offenders.

As the VAT system is complicated, a special relaxation applies to smaller business. If your VAT taxable turnover is £150,000 or less, HMRC sent you a letter offering support, rather than issuing a Surcharge Liability Notice on a first default. However, if you default again within the following 12 months HMRC issued you with a Surcharge Liability Notice.

You can find out more details on the default surcharge here.

At TaxAssist Accountants, we are experts in VAT compliance and advice. Allowing us to take care of your VAT affairs, not only gives you peace of mind, but it should also avoid you wasting your hard-earned cash on penalties and interest.

If you would like to discuss your tax affairs further please contact us on 020 3941 2011 or use our simple online contact form to arrange a free initial consultation.

Date published 25 Nov 2022 | Last updated 20 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

---